Projected Income Statement

The key basis for financial planning and project evaluation is financial information. The financial information is required to record, compare and evaluate a firm’s earning power and ability. In an already existing project, the financial information is already provided since it is a historical data. The income statement or the profit and loss account is a summary of revenues, expenses and net profit of an enterprise for a period of time. This serves as a measure of the firm’s profitability over the period. For an on­going project or firm, when prepared, the income statement becomes a historical statement. The projected income statement is a forecast of the revenues, expenses and the net profit of an enterprise or project.

The Projected Income Statement

The projected income statement is usually needed by a variety of people. Some of the users of the projected income statement might have direct interest in the firm while others have indirect interest. The owners or sponsors of a project have a direct interest in the projected income statement. It is so because they are entrusting their investment to the firm. They wish to know beforehand what the revenues, expenses and net profit of the firm will be, and most importantly, their own expected dividends.

Another important group that is expected to have a direct interest in the projected income statement of a project is the management. Usually when a project is conceived and a project plan is written, the plan will contain the projected income statement as conceived by the project sponsors or consultants. Usually, the projected income statement is handed down to the project managers as a guide. Also, financial institutions are interested in a projected income statement.

Practically, when any firm approaches a financial institution for financial assistance, the firm is expected to prepare a business plan or a project feasibility study which contains, amongst other things, the projected income statement. Financial institutions need to study the projected income statement to evaluate the revenues, expenses and profitability of the investment project. When they do this, they will also test the cash flows of the project to see whether the proposed project can repay any loan granted together with the interest.

Other people that might be interested in the projected income statement are potential investors. Potential investors need to examine the projected income statement to decide whether or not they will invest in a firm.

1.2 The Structure of the Projected Income Statement

We have just explained what the projected income statement is. It is a statement that shows projected revenues, projected expenses, and of course, net profit of a proposed investment, an expansion project or an existing project.

In the standard practice, there is an acceptable arrangement that should group like items together and this leads to building a projected income statement that is broken into revenues, expenses and the net profit.

Revenues

Ordinarily, revenues are the value of output of goods or services that an enterprise supplies to its customers. Revenues, therefore, arise when a firm produces or manufactures goods which it sells to third parties for a fee. Secondly, revenues can arise when a firm is engaged in the buying and selling of goods. It purchases goods which it later resells at a profit or a loss as the case may be. Thirdly, revenues can also arise through provision of services by a firm. A hospital may specialize in surgery and provide surgical services to its customers for whom it collects relevant payments, which when added up, make up the revenues.

Finally, a firm can earn revenue by loaning its economic resources. For example, a bank lends money to customers and earns interest income.

The interest earned is revenue. In projecting for revenues in a project situation, care must be taken so that proper estimates or forecasts are made. And this is made qualitative judgment plus quantitative judgment on the part of the project evaluator. For example, if the project is a manufacturing facility that will produce goods for the market, the best option is to start with the known market price of the good to be produced.

For example, if the good in question is the type of bread that sells for N100 a loaf, then the project evaluator or initiator has to start from the known price of a loaf of bread and that is N100 a loaf. If the number of loaves of bread to be produced per annum amount to 1,000,000 then the projected revenue of the project is N100,000,000.

Likewise, if a firm is engaged in the provision of services, the revenues likely to be earned can be easily estimated. If for example a hospital is projecting revenues, it has to first estimate the likely number of patients that will use its facility and also the average fee it charges a patient. The number of patients multiplied by the average fee per patient will give us the projected revenue of the health facility.

The projection for revenues can cover various periods. In most organisations, revenue projections for project evaluation purposes stretch over a period of three years. Some banks ask for five-year revenue forecasts. In the revenue projections care must be taken so as not to overstate the revenues or understate them.

Expenses

The cost of earning revenue is known as the expense. Expenses are different from costs. Cost is the outlay incurred to acquire some asset.

For example, when a car is purchased by a company for its business, the sum used to purchase the vehicle is the cost of the vehicle. If the vehicle uses fuel for the firm’s operations, that constitutes an expense. In projecting the expenses of a firm’s investment, a lot of factors are usually taken into consideration.

Firstly, we have to get proper estimates of the current cost profile of the various items. For example, when projecting gas and oil expenses of a project, the proper starting point is to collect data on the current prices of gas and oil.

Revenue Projections

From the proposed production plan, the following is the revenue profile for the project in year one (year 2007).

Table 30: Revenue Projection for a Vegetable Oil Refining Plant

Consumption of Utilities and Chemicals per Ton of Bleached and Refined Vegetable Oil

Steam at 50 psig = 70kg

Barometric water = 6 m3

Clean water in circulation = 7 m3

Fuel oil = 4 kg

Bleaching earth = 15 kg

Citric acid = 200 gms

Phosphoric acid (for dosing) = 300 gm

Vegetable Oil Packaging Expenses

The refined vegetable oil will be sold in two ways:

1. Direct to vegetable oil distributors who will purchase the vegetable oil in tanker loads. In this case, the vegetable Oil tankers will come and load vegetable oil at the factory.

2. The refined vegetable oil will be filled into plastic jerry cans of 9 litres and 18 litres capacity and also sold to the market. The purpose of this is to ensure that the brand of vegetable oil will be in affordable units and prices to the market.

Table 31: Projected Manufacturing Account for a Vegetable Oil Refining Plant

Projected Manufacturing Account for Year Ending 31^stDecember

Table 32: Projected Expenses for a Vegetable Oil Refining Plant

Projected: Selling and Distribution Expenses

Table 33: Projected Trading, Profit and Loss Account for a Vegetable Oil Refining Plant

Projected Trading, Profit and Loss Account for the Year Ending 31^stDecember

CONCLUSION

We have discussed the projected income statement. We discussed the structure of the projected income statement, revenues, expenses and net profit concepts. Finally we used as an example to demonstrate a projected income statement.

We have treated the projected income statement in this unit. The projected income statement is one of the most important items in project evaluation from the project sponsor’s position or from the bank or analyst’s position.